Wednesday, September 30, 2015

An interesting thing has popped up related to Jim Rickards prediction regarding the timing of the next big financial crisis. I have followed Jim Rickards for years and never heard him give any kind of hard date for this event to take place. He usually just says he cannot predict the exact timing and leaves it at "sometime in the next 3-5 years."

Recently however, he left a tweet on his twitter feed which seemed to indicate he was ready to announce that September 2016 is the time frame to watch for. I noted that on this blog as you can see here.

Also recently, Jim was asked directly about the timing for his predictions. In a very recent webinar, he once again left the timing open to sometime in the next three to five years with no mention of September 2016.

I am not sure what to make of this. We should note that his twitter message is a teaser asking people to subscribe to his newsletter. In the teaser he shows an image of an October 2015 issue article which clearly says that the date to watch for is September 2016. I don't know if this is just one of those teaser type headlines designed to get people to purchase the newsletter or if he really is setting a hard date of September 2016 since I don't have access to his paid newsletter.

Unless he comments on this further in public, I will assume he really is setting September 2016 as his hard time frame since that is what the image of his article shows. It could be that Jim is willing to give a hard date to those who subscribe to his newsletter and is not willing to do that in public interviews.

Below is the Q&A from the recent webinar where he answers the timing question. Tomorrow we will look at Jim Rickards vs. the BIS (Claudio Borio of the BIS) to see if Jim's prediction about the IMF stepping in like a global central bank conflicts with recent comments by Claudio Borio of the BIS. Mr. Borio recently said a global central bank is "out of the question."

Jon: Before we turn to Alex here, there’s been a consistent vocal minority, of which you’re a part, predicting an imminent financial crisis. You’re not saying when it will happen, but you’ve said again and again that we’re in for a financial crisis even beyond the scale of 2008. I often hear people speaking rather dismissively of “the doomsday crowd.” You pointed out recently that some of the voices in this so-called doomsday crowd include the Bank for International Settlements, the IMF, and the G20. I wonder if you could elaborate on that a little bit?

Jim: Sure. You’re right, Jon. I do see a catastrophic collapse of the international monetary system. I don’t think it’s inevitable; I don’t think it has to happen. I just think it’s very likely that it will happen, because I don’t see any signs that the remedial or preventive steps are being taken.

I can give you four or five things that could be done tomorrow that would prevent it from happening including breaking up the banks, banning derivatives, or banning high-frequency trading. None of these things really serve any particular purpose other than to enrich the individuals who are behind them. They don’t do society any good, so getting rid of them would lead to a more stable system that would still serve everyday investors in terms of market liquidity and being able to trade stocks in secondary markets, etc., which was the original purpose of a stock market.

I think there are things that could be done to prevent it, but then as an analyst, you have to say, “Okay, is anyone doing those things? Is anyone taking those steps?” The answer is no. Therefore, I’m back to the other branch of the tree, and that is if we don’t have systemic reform, we will have systemic collapse. That’s very easy to see. When I say easy, I mean there are recursive functions, analysis, science, and other equations behind it, but it’s a pretty straightforward analysis.

As far as timing, you cannot call it to the day, the month, or the year. I think over a five-year horizon, it’s more likely than not; over a three-year horizon, still more likely than not. But it’s not the same as saying it would be next month or next week, although it could be. That’s the interesting thing about it. When I say it’s more likely than not in three years, I don’t rule out the fact that it could happen tomorrow. I’m not predicting tomorrow; I’m just saying that that’s part of the analysis.

Having said that, I do not consider myself a doom-and-gloomer; I do not consider myself part of the doomsday crowd. When this catastrophic collapse that I’m describing happens, it will not be the end of the world. We will not all be living in caves eating canned goods with our trigger fingers on machine guns. I don’t think that’s true at all. I think we’ll still be in our houses, we’ll still wake up, and life will go on, but it will be a different world financially.

We’ll see extreme responses. We’ll see an emergency summit conference of leaders not unlike the November 2008 G20 conference in Washington that George Bush and Nicolas Sarkozy put together on fairly short notice. We’ll see a reformation of the international monetary system, maybe in a venue something like Bretton Woods. I would like to see that happen today in a rational forward-leaning way before the collapse happens.

As mentioned earlier, I recently spoke to Ben Bernanke, former Chairman of the Federal Reserve. I also had a conversation with John Lipsky. John is a very fascinating individual and a great guy. He is the only American ever to head the IMF.

People who are familiar with the IMF say, “Wait a second, the IMF job is reserved for non-Americans by tradition.” It’s not a law as such, but when Bretton Woods was set up, there was a sort of handshake deal that the head of the World Bank would always be an American and the head of the IMF would always be non-American. That’s been true for all these years, and yet John Lipsky, an American, was briefly head of the IMF for only a few months.

It was after Dominique Strauss-Kahn was arrested on an airplane in JFK and faced some fairly scandalous charges. Normally, the IMF succession is very orderly, but that was a little disorderly. Dominique had to resign. John was the number two guy, Deputy Managing Director, so he became Acting Head for a short period of time until they could decide on Christine Lagard, who came in a few months later.

Having spoken to the former Chairman of the Fed and the former head of the IMF just a few weeks apart – one conversation in Korea, one in Washington – they both used the same word to describe the international monetary system. That word was “incoherent.” I don’t think they rehearsed that for my benefit; I think it’s just the word that comes to mind among the power elite as to what’s going on.

This is indicative of the state of affairs and points to what you were saying, Jon. If you were to ask me who really runs the world of finance or what are the most powerful establishment institutions in the world, you could have the Fed on that list in terms of the elites and look at the Bilderberg Conference (I’ve spoken to Bilderbergers about this), but the three most powerful multilateral institutions would be the Bank for International Settlements (BIS) in Basel, Switzerland, the International Monetary Fund (IMF) based in Washington, and the Group of 20 (G20), which is a floating crap game of developed economies and BRICs and some emerging markets that meet all over the world on a rotating basis.

All three of them have issued very dire warnings. It’s not just, “Oh, gee. We better slow down. We better do this or that.” It’s “No, we are looking at a highly unstable financial situation.” They practically threatened Janet Yellen. Christine Lagard gave her multiple warnings. The G20 finance ministers just met in Turkey and issued a warning. These are very blunt warnings.

I hate to blame the victim, and I do sympathize with people who lose a large percentage of their net worth because they were all in the stock market and didn’t have some gold. However, when it happens, as much as one might sympathize with any investor who’s not prepared, there’s really no one to blame, because you have been warned.
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Tuesday, September 29, 2015

The Jakarta Globe runs this article quoting a Chinese official as saying China would respect the IMF's decision on whether to include the yuan currency in the SDR basket, but was hoping for a positive outcome. The IMF has said it will announce a decision on this later this year (this article says in November), but would not make any actual changes to the SDR basket until at least September 2016. Below are some quotes from this Jakarta Globe article.

"China is well placed to meet the criteria for inclusion in the International Monetary Fund's benchmark currency basket, the country's representative at the international lender said on Friday.

Beijing has launched a major diplomatic push for the yuan's inclusion in the IMF basket as part of its long-term strategic goal of reducing dependence on the dollar and France said on Friday it would back the bid.

Jin Zhongxia, executive director for China on the IMF's policymaking board, said China would respect the IMF's decision on whether to include the yuan currency in the Special Drawing Rights (SDR) basket, but was hoping for a positive outcome.

The yuan, also known as the renminbi, was already ranked as a top exporting currency, he said.

"More importantly, China can potentially satisfy all of the operational requirements for being a reserve currency in the SDR basket," Jin said at an Atlantic Council event. China had an active currency market, had recently liberalized interest rates and opened interbank bond markets and would soon open its currency market to foreign institutions, he said.

The IMF's executive board is scheduled to decide in November whether to add the yuan to a basket of currencies comprising dollars, euros, pounds and yen."

This is an ongoing story we follow here. It's pretty clear by now that major monetary system change that could impact the average person (which is what this blog is about) is not likely to take place on a global level until the global governance issues at the IMF are resolved. With the 2010 IMF reforms stalled in the US Congress and the date for actual change to SDR basket pushed back until at least September 2016, the evidence suggests we are not on the threshold of major change right now (this fall for example).

Recent comments by BIS Chief Economist Claudio Borio imply that there are no current plans for a global central bank at this time either. His comments also agree with input I get from other sources I view as highly credible as well. There seems to be no great push right now to act on a global basis other than to try and get the various national central banks to coordinate their individual policies.

If the IMF were to actually decide not to include the yuan in November, everything probably gets pushed back even further in time. If we are on hold for awhile, we may scale back articles here somewhat since major news that would impact what we cover here is likely to be a gradual process rather than a daily process. All the evidence I have right now suggests that unless a major crisis unfolds, the kind of changes we have talked about here are more likely to be a gradual process.

While there are many who are expecting a major crisis this fall, so far it has yet to materialize and many of my sources are not indicating they expect one this fall. Here, we freely admit we have no way of knowing if and when we will get another major crisis any time soon. If one does emerge, we will see if that alters any timetable for change.

In this interview, the ongoing relatively low price for gold given reports of tight supply is discussed. Below are a few selected questions and answers from the interview.

Jon: Hello. This is Jon Ward with Physical Gold Fund. Recently I was privileged to hold a candid conversation with one of the most connected and influential people in the physical gold market. The gentleman you’re about to hear from holds a senior position in one of the five largest precious metals refineries on the planet. Because of his current position and his decades of prior experience, he has a deep inside knowledge of today’s physical gold markets. His insights and unique perspective on these markets goes way beyond what you will ever find in the mainstream press. Due to the sensitivity of the information he reveals in this interview, his identity and that of the refinery he works for have been withheld. . . . . . .

Jon: In your day-to-day work in this industry, what are your primary sources of information about the precious metals market?

Head of Refinery: We have, by nature, a lot of direct information. If you look at the trucks driving in and out, look at the bar lists, and look at the capacity utilization, that gives you some information already. It could be misleading, however, if you try to correlate the physical business with the prices. You have to be very careful there.

Information is also dependent on the network you have. At my age, there are a lot of downsides, especially if you get up in the morning and you feel your bones! But age also has advantages in the network we have here. It is huge. We have been an internationally oriented company since the beginning, so our contacts really are all over the world. We are proud of this network, and therefore, I would say our information is coming less from the newspapers and more from the market.

Jon:Yes, it’s from the people you talk to personally day-by-day across the world. In 2013, I recall you commented on the tightening of physical supply in the gold market and even the difficulties you were having in sourcing material. In fact, as I remember, you remarked that in 30 years, you’d never seen anything like it. Is that situation still true in 2015? How difficult is it to source the metal you need today?

Head of Refinery: The situation has not changed. It is truly difficult. This is also reflected by the price. It is getting more and more expensive to get material out of the market, and also there is less liquidity in the physical precious metals market than there used to be in the past.

Jon: Wouldn’t you say there’s a paradox here because the price of gold on the spot market is seen as low? What’s your understanding of the current price of gold? How well does the price today reflect the realities of physical supply and demand you just described?

Head of Refinery: The price does not reflect the realities at all. Don’t forget, we have a huge amount of artificial gold or paper gold floating around the market. If you look at the numbers of futures exchanges, there is a lot of metal you can’t even detect because it is within some derivative product, which in the end, you have no clue how much it is and on which side it is.

The other point is that nobody is interested in any physical delivery at the end. These products are all cash settled. People are happy just to use the spot market as a benchmark, and the product itself never ends up in the physical market. This looks dangerous to me. If we were to have a situation where everybody said, “Okay, now I have a long position that expires, so I want the physical,” for sure, the physical would not be around.

Jon: That’s a big ‘if,’ of course. Is it your belief that this paper market can be sustained indefinitely with a huge mismatch between the price in the market and the supply and demand in the physical? Can this go on forever, or do you think will it break at some point?

Head of Refinery: It depends very much on the behavior of market participants. Generally, if you look at the situation we have now, nobody understands the price of gold. We have serious geopolitical, not only risks, but already issues. We have a financial world with debt crises we have not seen for decades. We have a relatively low gold price that is in no correlation with the physical market. So there is question mark after question mark.

Will this continue? I think it depends very much on the behavior of the people. As long as market participants are happy for cash settlements, this can go on forever. The spot market price of gold is nothing more than a number, a benchmark. People are happy with cash settlements or they take the currency. If this behavior should change, then it could become dramatically dangerous.

*Why trying to correlate physical flows with the price can be misleading*On-going tightness in the physical gold markets*There is less liquidity in the physical market*The physical tightness of flow is reflected in the price “not at all”*As long as the spot market is settled with cash settlement, the physical flows are not determining price*If investors dealing in cash markets begin to take delivery, the physical is just not around*The current pricing mechanism can continue indefinitely unless investor behavior changes to taking delivery versus cash settlement*The gold price has “no correlation to the physical market”*If this behavior changes (to taking physical delivery) it could become dramatically dangerous*Gold is moving in one direction from west to east with small exceptions over the last year*90% of the refinery’s business is currently supplying demand from the east (India, China) and 10% to western markets*China has imposed a new standard on the LBMA good delivery system of 1 kilo, 999.9 fineness*400oz bars being melted and refined to 1 kilo 999.9 fine bars and shipped into China are coming out of London and particularly the ETF’s such as GLD*In the next gold upleg, scrap may not be readily available – overall scrap has decreased remarkably*Declining investment in the mining sector and geo-political issues affecting mining viability will unavoidably reduce gold supply moving forward*The danger of less supply moving forward is more likely than the comfort of more supply

Sunday, September 27, 2015

This is an off topic article that caught my attention since I live in Texas. The article contains some interesting information about how the electricity grid works in Texas and how for the first time ever the price of electricity in Texas actually went negative for a little while. Below are some quotes from the article which you can read here in full in Business Insider.

The impossible just happened in Texas

"In the wee hours of the morning on Sunday, the mighty state of Texas was asleep.

The honky-tonks in Austin were shuttered, the air-conditioned office towers of Houston were powered down, and the wind whistled through the dogwood trees and live oaks on the gracious lawns of Preston Hollow.

Out in the desolate flats of West Texas, the same wind was turning hundreds of wind turbines, producing tons of electricity at a time when comparatively little supply was needed.

And then a very strange thing happened: The so-called spot price of electricity in Texas fell toward zero, hit zero, and then went negative for several hours. As the Lone Star State slumbered, power producers were paying the state’s electricity system to take electricity off their hands. At one point, the negative price was $8.52 per megawatt hour.

Impossible, most economists would say. In any market — and especially in a state devoted to the free market, like Texas — makers won’t provide a product or service at a negative cost. Yet this could only have happened in Texas, which (not surprisingly) has carved out its own unique approach to electricity."

In a recent blog article on his site, Jared Collins looks at the recent Fed decision not to raise rates and suggests this may indicate the US Fed is now willing to look beyond US borders in making its decisions. He also notes that the crisis conditions many were predicting for September have not come to pass so far. Below are some quotes from his article.

----------------------------------------------------------------------------------------------------"With the announcement by the Fed today of no interest rate increase, the hopes and fears of a September crash recede into the background noise from which they came. What we can expect is the same slow grind of deflation and modest volatility leading into the fall and winter months. Though nothing the Fed said today would indicate that a rate increase is off the table for 2015, and could still take place in December.The international demand on the Fed not to raise rates was coming from all sectors and regions, including the Bank for International Settlements, IMF, World Bank, China, and various other central banks and institutions. With a level of domestic justification for a rate increase, quantified by previous Fed statements on inflation and employment levels over the last few years (all of which have been reached), it can be assumed that the lack of international justification and support influenced today’s decision.

With the restructuring of the international monetary system high on the agenda of the global institutions, it is probable that the decision by the Fed today is signaling that the US is in fact willing to negotiate and facilitate the development of reforms.

The deadline for the 2010 Governance Reforms has come and gone with little fanfare. The framework of Plan B reforms is scheduled to be determined by Sept 30, and implemented by December 15th. This timeline would correspond with the next FMOC meeting and decision on rates."

Europe must urgently confront a growing mountain of bad loans if there is to be a revival in bank lending that is essential to the continent’s economic recovery, the International Monetary Fund said Thursday.

In the years following the financial crisis, a rising number of businesses and households around the world found it difficult to meet interest payments on their debts. But the IMF said the problem of nonperforming loans, as those debts are known, has become particularly acute in Europe.

“Given the urgent need to support Europe’s still tentative recovery, resolving NPLs expeditiously to promote new lending is of first-order macroeconomic importance,” the IMF said.

A report by the Fund’s staff said NPLs in the 28-member European Union stood at about €1 trillion (about $1.12 trillion) at the end of last year, more than double the 2009 level and equivalent to more than 9% of annual economic output. In the 19 members of the EU that use the euro, NPLs stood at €932 billion.

$1 Trillion in non performing loans (NPL's) seems like a lot to me. The IMF says the problem is "urgent" and that banks should look for ways to sell the bad loans at book value and take the losses. Nothing about this is going to quiet those who see another major global crisis coming in the future.

Has the US Lost its Role as the Underwriter of the Economic System? by WILLEM WIDDELKOOP

"The recent news that Britain aspires to become one of the founding members of
the new Asian Infrastructure Investment Bank (AIIB), has shocked many. Larry
Summers, who served as a Secretary of the US Treasury between 1999 and 2001,
immediately understood the significance of these developments, and wrote in an
op-ed for the Washington Post: March 2015 may be remembered as the moment the
United States lost its role as the underwriter of the global economic system. I can
think of no event since Bretton Woods comparable to the combination of China's
effort to establish a major new institution and the failure of the United States to
persuade dozens of its traditional allies, starting with Britain, to stay out.‘

This British announcement was highly criticized by the US. The Financial
Times quoted an unnamed US official: We are wary about a trend toward constant
accommodation of China, which is not the best way to engage a rising power. This
decision was taken after no consultation with the US.‘

Summers was also highly critical of the US‘ strategy toward the newly founded
AIIB: The U.S. misjudged the situation tremendously, put pressure on allies and
developing countries to under no circumstances be part of AIIB. Largely because of
resistance from the right, the United States stands alone in the world in failing to
approve International Monetary Fund governance reforms that Washington itself
pushed for in 2009. By supplementing IMF resources, this change would have
bolstered confidence in the global economy. More important, it would come closer
to giving countries such as China and India a share of IMF votes commensurate with
their increased economic heft.‘"

. . . . . .
"As mentioned, one of the prime reasons for the establishment of the AIIB has
been Chinese frustration with, the slow pace of reforms and governance in global
established institutions like the IMF, World Bank and Asian Development Bank,
which it claims are dominated by American, European and Japanese interests.‘

The AIIB will be used to finance large infrastructural investments mainly in Asia.
The Asian Development Bank (ADB)has published a report stating that the region
requires up to $9 trillion in infrastructural investments in the coming years.
Although China is the largest investor in the region, it has merely 5% of the voting
rights in the ADB, while Japan and US have a total of 26% of the voting rights (13%
each).

This can be seen as an attempt to keep the Asia investment developments
under Western control.
This same kind of US dominance can be found within the voting structures of the
IMF and the World Bank. According to some, international politics play an
important role in IMF decision making. The most important decisions within the
IMF require a special majority of 85% of the votes, giving the USA, with over 17%
of the votes, an effective veto. France, a country with just over 65 million people,
currently has more voting rights (4.29%) within the IMF than China (3.99%) with 1.3 billion inhabitants. Belgium, with just over 10 million people, has more voting
rights (1.86%) than Brazil (1.72%), a country with a population exceeding 200
million."

Wednesday, September 23, 2015

Every now and then we need a break from all the serious stuff. Yesterday former NY Yankee Yogi Berra passed away at the age of 90. Most everyone knows Yogi was famous for his ability to turn a phrase in an amusing way. USA Today runs a list of his 50 greatest quotes here. Below are the Top 20 in the list for your enjoyment.

8. Always go to other people’s funerals, otherwise they won’t come to yours.

9. We made too many wrong mistakes.

10. Congratulations. I knew the record would stand until it was broken.

11. You better cut the pizza in four pieces because I’m not hungry enough to eat six.

12. You wouldn’t have won if we’d beaten you.

13. I usually take a two-hour nap from one to four.

14. Never answer an anonymous letter.

15. Slump? I ain’t in no slump… I just ain’t hitting.

16. How can you think and hit at the same time?

17. The future ain’t what it used to be.

18. I tell the kids, somebody’s gotta win, somebody’s gotta lose. Just don’t fight about it. Just try to get better.

19. It gets late early out here.

20. If the people don’t want to come out to the ballpark, nobody’s going to stop them.

Here's #50 for a bonus:

50. A lot of guys go, ‘Hey, Yog, say a Yogi-ism.’ I tell ’em, ‘I don’t know any.’ They want me to make one up. I don’t make ’em up. I don’t even know when I say it. They’re the truth. And it is the truth. I don’t know.

-----------------------------------------------------------------------------------------------------"Chinese President Xi Jinping will address members of a business roundtable in Seattle during his upcoming US visit. Xi’s trip will begin with meetings with high-tech executives in Seattle on Wednesday.". . . .

"Thirty chief executives of prominent US and Chinese companies will attend the event. These include CEOs of Apple, Microsoft, IBM, Boeing, Amazon and Chinese firms Alibaba, Tencent and Baidu among others.

With global markets unsettled by China’s slowing growth, Xi will seek to assure the representatives of US and Chinese big business of China’s commitment to pushing through further reforms."

. . . .

"China and the US are locked in competition over trade and over military and diplomatic influence in the region.

China has repeatedly accused the US of trying to profit from the historical maritime territorial disputes between China and some of its neighbors.

In May last year, the United States charged five Chinese military officers with hacking American firms, prompting China to shut down a bilateral working group on cybersecurity.

“In terms of both military and political intelligence and trade secrets, the United States is the world’s No.1 cyber thief and its spying force should be indicted,” Sun Jianguo, deputy chief of General Staff of the Chinese People’s Liberation Army, said.

Recently I wrote an article here on the blog on what I refer to as "The Information Gap" in society. It is about the knowledge gap that exists between those on the inside of the system (the information rich) and those of us on the outside (the information poor). Now Business Insider runs this article which is a great illustration of one of the contributing factors to this information gap.

Here are a few quotes from the Business Insider article.

"This infographic created by Jason at Frugal Dad shows that almost all media comes from the same six sources.

That's consolidated from 50 companies back in 1983.

NOTE: This infographic is from last year and is missing some key transactions. GE does not own NBC (or Comcast or any media) anymore. So that 6th company is now Comcast. And Time Warner doesn't own AOL, so Huffington Post isn't affiliated with them.

But the fact that a few companies own everything demonstrates "the illusion of choice," Frugal Dad says. While some big sites, like Digg and Reddit aren't owned by any of the corporations,Time Warner owns news sites read by millions of Americans every year.

This fact is why when I do research for articles on this blog I look at both mainstream and alternative news sites. If you spend any time at all doing this kind of research, you quickly realize that the mainstream media is not the home for all truth. In fact, as we can see from this Business Insider article, it's not really that hard to keep important information from the public if just a handful of executives at six corporations decide to do so. Alternative media sources have helped fill that gap to some degree even if there is also a "wild west" aspect to some alternative media sites. That's OK. It forces people to do their own due diligence to separate high quality information from low quality information. Either is better than no information at all.

Tuesday, September 22, 2015

We have noted here on the blog that many have been calling for a major crisis this fall that would lead to major monetary system changes. So far, that has not happened this fall. Until now, Jim Rickards has never issued any kind of hard date as to when his predicted crisis would happen that we had seen.

It appears he may now have provided a date to watch for. On his twitter feed, he posted the re-tweet below suggesting September 2016 is the time frame to watch for. Of course we will follow events to see how this turns out.

While this information appears to be contained in an article available only in a paid subscription, the fact that Jim tweeted out the above suggests he is ready to give September 2016 as a hard date to watch for major changes like we cover here on the blog. I will add that his statement as seen in the image of the article above that no "reset" is coming this fall agrees with all the evidence and other sources I have at this time. On October 1st, I will do a blog article that looks at what Jim Rickards is forecasting compared to what we have just seen from the BIS Chief Economist (no global central bank is coming) to see if we can reconcile the apparent conflict. One thing is clear. Jim does not see anything significant happening this fall regarding a reset as so many have been predicting. So readers can evaluate that comment over the next 2-3 months in comparison to all those calling for a major event this fall.

Monday, September 21, 2015

Claudio Borio is Head of the Monetary and Economic Department at the Bank for International Settlements (BIS). Recently he conducted an in depth interview on a wide range of topics. One of the big questions that we have raised here on the blog is whether we might some day see a global central bank using a global reserve currency. Jim Rickards has talked about the IMF perhaps some day stepping into this role.

So, did this question come up in the interview? Yes it did. The question was asked directly to Mr. Borio. His answer was "No, this is out of the question." So there you have it directly from one of the most influential and knowledgeable individuals in the world. Below are some selected Questions and Answers from this very interesting interview. You can read the full interview here.

Q: Regarding China, some observers argue that the link between the Chinese financial system and the global financial system is weak and that, because of that, there is no risk of a global financial crisis as in 2007-08.

A: I don't want to speculate about the next big crisis. But I would caution against underestimating the financial linkages. And, of course, China has a major impact on trade and commodity prices. Moreover, it is shared vulnerabilities that matter most.

. . . . . .

Q: The cooling-down of the Chinese economy and the depreciation of the renminbi have also led to concerns that global inflation, which is already very low, will be dampened further. What is your view on that?

A: Sometimes we seem to believe that we know more about the inflation process than we actually do - we do not fully understand what drives it. Having said this, at the BIS we are of the view that global factors have often been underestimated. We think that there are still significant disinflationary forces coming from technological progress and, above all, the globalisation of the world economy. These secular factors are headwinds that have held inflation down despite very easy monetary policies. But these are welcome supply side forces, which support the economy . On top of that, there are some cyclical factors at the moment.

. . . . . .

Q: After years of low inflation rates, some observers are already saying inflation is "dead".

A: This is by no means true. A number of countries have high inflation rates. To assume inflation is "dead" is the best way to make sure that it will become a big problem again.

. . . . .

Q: At the moment, the Fed is heading for a first interest rate increase after six and a half years of a zero interest rate policy. The IMF has warned against possible turbulences in financial markets. Do you also see a risk that the US interest rate reversal could jolt financial markets?

A: The Fed will increase the interest rate only when it thinks that the US economy is strong. That strength would help the world economy. In addition, to minimise the shock, the Fed has almost preannounced this step and been very cautious in its communication - not only regarding the "lift-off" but also regarding what it will do thereafter. But in assessing the impact, we should bear in mind that, as noted earlier, there are financial vulnerabilities in the global economy. And in the past, a monetary policy tightening in the US and an appreciation of the dollar have triggered turbulence in EMEs. This has to do, in particular, with the special role of the dollar.

Questioner: The dollar is the world's dominant currency.

Borio: Yes, as such, the US sets the tone for global financial markets. And, more directly, financial conditions there have an impact because many borrowers around the world - in more recent years, especially companies - have heavily borrowed in dollars. For instance, since early 2009, the amount of dollar credit to non-banks in EMEs has almost doubled.

. . . . .

Q: In its recent Annual Report, the BIS calls for more central bank cooperation, even including joint decisions on interest rates and exchange rate interventions. Do we need a new Bretton Woods?

A:No, that's not the point. But a key drawback of the existing international monetary and financial system is that it tends to heighten the risk of financial imbalances. First of all, we call for an enlightened self-interest. Central banks should take better account of the consequences of their decisions on others, especially because these will have repercussions on their own economy ("spillbacks"). This enlightened self-interest is particularly important for countries with an international currency. They have a special responsibility.

Q: But this is not always sufficient from your point of view?

A: We should also not exclude the possibility of joint decisions. We have seen this in times of crisis. But it could also make sense for crisis prevention. And then, ideally, once could even go one step further. Policymakers around the world could agree internationally on common rules constraining national policies. This would increase discipline on a national level. (my added note: this is the idea of "new rules of the game")

Q: Do you think this is realistic?

A: At the moment, this is not on the cards. But national frameworks do not sufficiently take into account financial booms and busts. If they did, this would remove a major source of negative international spillovers. This would significantly reduce the need for further cooperation, but not eliminate it. To move in this direction, we need greater agreement on diagnosis.

Q: And in the end, would one also need a global central bank? Some experts have pushed this idea from time to time.

A: No, this is out of the question. We know how difficult it is to have a central bank covering a number of very different economies. The euro area is an example of this. It is neither feasible nor desirable to have a world central bank.

This is obviously a significant interview that directly relates to what we cover here on the blog. Mr. Borio is a key figure at the BIS. Here he once again raises the idea that there may be a need for new "rules of the game" for the international monetary system. However, in this interview he explains that more clearly. He says this could mean a need for various national central banks to work together more often in the future. But he completely rules out the idea of global central bank. Just to make sure we get the point he says, "It is neither feasible nor desirable to have a world central bank." Mr. Borio mentions the problems in the Eurozone as an exmple of how hard it is to bring multiple economies under one umbrella.

This is an important statement. It tells us that there are no current plans for anything like a global central bank on the drawing board. In addition, it makes it clear that the existing global institutions (the IMF and the World Bank) will continue to function much the same as they have with the possible tweak that they might help national central banks coordinate policy at times (under new "rules of the game").

This also suggests to me that the new institutions that China and the BRICS have started up (the AIIB and the BRICS Development Bank) are likely to become more competitive with the IMF and the World Bank over time. With the 2010 IMF reforms stalled and the decision to move back any change to the SDR currency basket to at least September 2016, there is nothing that suggests any kind of global cooperative effort to establish one global central bank or reserve currency is at hand.

We have noted here that a new major global crisis (worse than 2008) could change things. But at this time, all the available evidence suggests that no major monetary system change involving a new global central bank or global reserve currency is coming soon (certainly not this fall). The evidence we can find right now suggests we are more likely to see change evolve gradually over time on a regional level.

We will continue to follow this over time. If new information surfaces, we will cover it here.----------------------------------------------------------------------------------------------------------Added note:Mr. Borio followed up this interview with a slide presentation later in which he once again mentions a possible need for "new global rules of the game." (see page 23 of the presentation here)Additional added note:Willem Middelkoop adds this comment on his twitter feed.Mr. Middelkoop has very good contacts in China so his added comment on this is very interesting. It suggests the ongoing difference of opinion between the US and China on how to go forward is very real. How this gets resolved will be an important story to follow if you have any interest in the potential for monetary system change.

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